Owning an investment property can be financially rewarding, but to maximise your tax return you need to minimise your tax obligations. Fortunately, there are many expenses related to your investment property that may be tax deductible, helping to reduce your taxable income and boost your after-tax cash flow.
The key is to be thorough in claiming all the deductions you’re entitled to. From depreciation on fixtures and appliances to interest on your loan, repairs and maintenance costs, property management fees and more, there are likely thousands of dollars in potential deductions going unclaimed each year.
Here, we’ll cover the major categories of investment property deductions you may be eligible for in Australia, as well as tips and tricks for maximizing your tax savings. You’ll understand how to keep proper records, when to use a quantity surveyor, and how a tax professional can help you uncover every last deduction and put more money back in your pocket. So, if you want to minimize your tax bill and maximize your returns from your investment property, keep reading to learn how.
Claiming depreciation for items in your rental property is one of the best ways to lower your tax bill. Depreciation basically means writing off the value of things in your place that lose value over time, like appliances and fixtures.
The first thing you’ll want to do is get a depreciation schedule done up by a quantity surveyor. They’ll come out, make a list of everything in your property that can be depreciated and how quickly it loses value. This includes things like air conditioners, hot water systems, stoves, carpets, curtains and blinds – pretty much anything that’s permanently there.
The surveyor will sort all that stuff into different categories depending on how long each item lasts. Then they’ll recommend the best method for you to claim the depreciation – either the diminishing value one where you get more deductions upfront, or the straight line method where it’s steady over time.
New depreciation tax laws
Note: From 1 July 2017, the tax laws were changed to disallow any second hand items being depreciated on the tax return. Only depreciation on new items could be claimed as a tax deduction on the return. Second hand assets purchased could be claimed as a deduction however, only at the time of selling the property and this would be used as part of the Capital gains tax calculation. For this reason it is important to evaluate whether buying new items is more beneficial now in order to claim a deduction rather than buying a second hand item and having to wait until you sell the property to get the benefit.
Make sure to hang onto receipts for anything new you buy for the place and pass them onto your bookkeeper and tax agent. That way you keep getting those sweet depreciation deductions!
In a nutshell, getting a good depreciation schedule done from the get-go will set you up to maximize those depreciation deductions. It’s one of the easiest ways to lower your tax bill as an investment property owner.
One of the easiest deductions to claim is interest on your investment loan. Any interest you pay on a loan taken out specifically to purchase or improve your rental property is tax deductible.
This includes not only the standard loan repayments but also any interest charged on lines of credit attached to the loan. Lines of credit are handy for covering unexpected costs or renovations, so the interest you pay on them can be claimed as a deduction too.
To claim the deduction, you’ll need records showing the interest charged on your loan – this will be on your loan statements. Add up the total interest paid for the financial year and claim that amount. The good thing is you don’t have to apportion the interest between private and investment use – as long as the loan is solely for the investment property, all the interest is deductible in full.
The bigger the loan and the higher the interest deduction! So don’t stress too much about having a large investment loan – the interest deductions can help offset some of the costs. Just make sure to keep your loan statements as proof of the interest paid for the taxman.
Repair and Maintenance
To claim a deduction on repair and maintenance made to your rental property, you’ll need to keep invoices and receipts. Things like repairing appliances, replacing light fittings, fixing leaks or painting the place are all deductible expenses. Even costs like pest control and gardening can be claimed if it helps keep the property in good condition for tenants.
The taxman likes to see proof though, so keep those invoices and receipts! Bank statements usually aren’t enough. Some examples of deductible repairs include: replacing broken floorboards, repairing holes in walls, fixing sections of the gutters, repairing sections of the fences or gates, servicing air conditioners and hot water systems. Basically, if it helps keep your property in good working order, it’s likely deductible.
The good news is there’s no limit to how much you can claim for repairs and maintenance in a single year. So if you have a lot of expenses, go for it! You can claim the full cost of parts and materials, as well as any labour costs paid to tradespeople.
Property Management Fees
If you hire a property manager to collect rent, organise repairs and maintain your investment property, those fees can be claimed as a deduction in full.
To claim the deduction, you’ll need records showing the fees paid to your property manager. This will typically be on invoices or statements they provide you with. Add up the total fees for the financial year and claim that amount. As long as the fees relate solely to managing your investment property, the full amount is deductible.
The property management fees usually include a percentage of the rent collected as well as additional charges for things like organising repairs, inspecting the property and dealing with tenants. All of these fees help generate income from your investment, so they can all be claimed as deductions.
Any costs associated with advertising your rental property or finding new tenants can be claimed as a tax deduction. This includes things like real estate agent commissions, advertising fees and even signage costs.
For example, if you use an agent to list your property and find new tenants, the commission you pay them is fully tax deductible. Just keep the invoice or statement from the agent showing the commission amount and claim that on your tax return. The same goes for any fees paid to advertise your property online or in the newspaper – keep those invoices or receipts and claim the full amount.
You can even claim costs for things like “For Lease” signs, business cards and flyers if they help attract new tenants. As long as the expenses are directly related to advertising your investment property for rent, they can be deducted in full.
Certain major improvements to your property worth over $300 can be claimed as building write off. This includes things like installing a swimming pool, driveway, carport, fence, deck or pergola. These items typically add value to the property or make it easier to rent.
Where these capital works for your investment property were completed before you owned the property, you’ll need a quantity surveyor to inspect the improvements and prepare a report in order to know what can be claimed as a deduction each year. They’ll determine the cost of the assets and the values left to claim over a number of years.
If you completed the capital improvements during your ownership receipts must be held to verify your claims. If receipts are lost, a quantity surveyor’s report is recommended as they can give an estimate of the costs and the ATO accepts this report the same as it would a receipt. Then you can claim a deduction for the decline in value of the assets over their effective life.
Some examples of common capital works deductions include:
- Swimming pools
- Driveways and carports
- Fences and retaining walls
- Decks and pergolas
The key is to keep records of the costs of any capital works like invoices, receipts and contracts. And get a depreciation schedule from a quantity surveyor so you can correctly claim the deductions.
Insurance for your rental property includes things like building insurance, contents insurance and landlord insurance. As long as the policy relates solely to covering your investment property, the full premium can be deducted.
For example, building insurance covers repairs if the property is damaged, so that’s fully deductible. Contents insurance for furniture and appliances in the property can also be claimed in full. And landlord insurance covers things like public liability if a tenant is injured, so those premiums are deductible too.
If you pay any utility bills solely for your rental property, you can claim them as a tax deduction. This includes things like electricity, gas, water and even phone and internet.
Some examples of deductible utility costs:
- Electricity bills – Claim the full amount if it’s only for common areas and appliances within the rental property.
- Gas bills – If gas is used for heating or hot water within the investment property only, claim the full bill.
- Water bills – Claim the cost of water used by the tenants, as shown on invoices from your water provider.
- Phone and internet – If you pay for a landline or internet connection solely for your tenants to use, those bills are fully deductible.
To make sure the taxman is happy with your claims you’ll want to keep good records for all your rental property deductions. Here are the main types of paperwork to hold onto:
Invoices and receipts – These show exactly what you spent money on, so keep all invoices and receipts for expenses like repairs, maintenance, utilities, advertising costs, insurance premiums, property management fees etc. Bank statements alone usually aren’t enough!
Depreciation schedule – If you’re claiming depreciation, get a depreciation schedule from a quantity surveyor that lists all the depreciating assets in your property. Keep this schedule and update it when new assets are purchased.
Loan statements – These show the amount of interest you paid on your investment loan over the financial year. Keep your loan statements for the period to substantiate interest deductions.
Contracts – If you undertake any major capital works, keep copies of contracts and quotes to prove the costs incurred.
Tax invoices – For any large purchases like appliances, keep the tax invoice to prove the cost if you want to claim depreciation.
Lease or rental agreement – This proves your property was rented out and used to generate income.
In the end, while keeping good records and claiming all the deductions you’re entitled to is important, using a tax agent can really help maximize your rental property tax savings. A good agent understands all the ins and outs of deductions related to investment properties, and can ensure you don’t miss out on anything you’re eligible to claim. They’ll review your expenses, check your depreciation schedule, identify any additional deductions and prepare your tax return to maximize your refund. And the best part? Any fees paid to your tax agent are also tax deductible!